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Euro zone business keeps up solid pace of growth - PMI

Markit's Composite Purchasing Managers' Index edges down to 53.9 from April's near 3 year high of 54

The strong pace of growth in the euro zone's private sector eased very slightly this month, with drastic price cuts preventing any further slowdown, new surveys showed today.

Slower growth in activity at factories took the shine off an unexpected pickup in the service industry, although the bloc's recovery appears to be gaining traction.

"This doesn't change the picture of the euro zone having one of its best growth spells in the past three years. It's broad-based - with the one exception being France," said Rob Dobson, senior economist at survey compiler Markit.

Markit's Composite Purchasing Managers' Index is based on surveys of thousands of companies across the region and is seen as a good indicator of growth.

It edged down to 53.9 from April's near three-year high of 54, matching the forecast in a Reuters poll of analysts.

Readings above 50 indicate expansion, and Markit said the index pointed to second-quarter economic growth of 0.5%, which would be the strongest in three years and better than the 0.3% predicted in a Reuters poll earlier this week.

That would be good news for the European Central Bank. But the ECB will be less happy about the composite output price index, which held steady at April's eight-month low of 48.7 as firms discounted prices for the 26th month in a row.

In an attempt to stop inflation, stuck well below half its 2% target ceiling, from falling any further the ECB will cut what little it has left of its main interest rate and push the deposit rate below zero next month, yesterday's Reuters poll predicted.

An earlier PMI from Germany showed Europe's largest economy was again the driving force - its composite PMI held steady at 56.1.

But it was a different story in France, the euro zone's second largest economy, where the composite PMI slumped back below the 50 mark after just two months in growth territory.

"The big thing for France, which is different to Germany, is that the French domestic market is still on a bit of a downturn," said Dobson.

But a PMI survey of the bloc's dominant service industry jumped to a near three-year high of 53.5 from April's 53.1, confounding expectations for a dip to 53.

The manufacturing PMI fell to 52.5 from 53.4, missing the median forecast for a more modest decline to 53.2 in a Reuters poll. The output index, which feeds into the composite PMI, sank to 54.7 from 56.5.

Some of that stunted growth was from running down old orders. The backlogs of work index fell below the 50-mark for the first time since July, coming in at 49.4 from 51.7.

To meet growing demand for services, firms took on staff at a faster rate this month - and the employment subindex rose to 51.1 from 50.5, its highest reading in nearly three years.

Unemployment across the 18 nations using the euro nudged down in March but stayed near a record high, a sign European households are yet to feel the bloc's economic recovery.

"For the euro zone as a whole the recovery so far has been fragile and very moderate. What will start to turn this into being a recovery which will be really sustainable will be if it can create more jobs," Markit's Dobson said.